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Shorts Are Piling Into These Stocks. Should You Be Worried?

Do short-sellers have these stocks pegged? You be the judge!

The best thing about the stock market is that you can make money in either direction. Historically, stock indexes have tended to trend up over the long term. But when you look at individual stocks, you'll find plenty that lose money over the long haul. According to hedge fund institution Blackstar Funds, even with dividends included, between 1983 and 2006, 64% of stocks underperformed the Russell 3000, a broad-scope market index.

A large influx of short-sellers shouldn't be a condemning factor to any company, but it could be a red flag from traders that something may not be as cut-and-dried as it appears. Let's look at three companies that have seen a rapid increase in the number of shares sold short and see whether traders are blowing smoke or if their worry has some merit.

Sink or swim?The dry bulk shipping sector has been the epitome of feast or famine since 2007. The incredible rise of dry bulk rates coupled with their even faster descent and shipbuilding overcapacity has led to years of underperformance from shippers. Personally, I've shied away from the sector for a number of reasons, including low charter contract rates, overcapacity, and weak global demand for the commodities these shippers transport. However, if I were to pick one outperformer, it'd be Diana Shipping.

Keep in mind that Diana's story is far from perfect. Diana's fourth-quarter revenue dropped 75% as revenue from its day-rate charters, its primary source of revenue and profit, fell 14%. However, Diana also offers some advantages that should help it navigate these rough seas.

First and foremost, 26 of its 32 operational vessels are locked into contracts into at least the first quarter of 2014. That may not seem like a long time, but it provides predictable cash flow while also allowing the company the flexibility to negotiate new contracts if the Baltic Dry Index rises considerably rather than getting stuck for three or more years at historically weak shipping rates. Also -- and this is key -- Diana has only $13.5 million in net debt and has been cash flow positive on an operational basis over the trailing-12-month period. With so many of its peers deeply underwater in terms of debt, short-sellers may want to carefully wade around Diana.

Fashion doesn't take a holidayThere's not much that gets my goat more than when retailers trot out the poor weather excuse for why their results weren't up to par. But in the case of TJX, parent of T.J. Maxx, I'm going to let it slide.

TJX's March same-store sales definitely didn't hit the mark compared to what we're used to seeing from the discount brand-name retail chain. Same-store sales dropped 2%, which the company blamed on colder-than-normal weather, and saw a 1% retracement over the first three months of the year.

In TJX's defense, it was up against some very robust comparisons from last year's exceptionally warmer winter. In addition, Ross Stores(NASDAQ:ROST), which has comparably priced designer wear that caters to fashion-savvy-but-cost-conscious shoppers, delivered a 2% increase in same-store sales compared to a 10% boost last year, echoing the same tough comparisons at TJX. To me, this doesn't demonstrate struggles at either discount retailer. Instead, it shows continued strength as sales barely budged lower even as the weather proved challenging once again this year. Consumers are definitely fickle when it comes to spending on apparel, but TJX and Ross have both shown incredible consistency with regard to inventory management and getting the right product at a reasonable price point. Bet against TJX or Ross at your own peril.

Can this stock shine once again?Chances are that if you own mining stocks, they are down across the board over the past month. That goes double for gold miners like IAMGOLD that operate in Africa and whose mining costs, because of labor disputes and difficult access, run much higher than the average in the sector. But can IAMGOLD shine once again?

I think the answer to this is yes, but it's definitely going to need some help from gold spot prices, and it'll need to formulate solidly structured contracts with its labor force in Africa. Last year, AngloGold Ashanti (NYSE:AU) was forced to come to a pay raise agreement with some 10,000 striking workers, after a strike that completely closed its TauTona and Mponeng mines for months. AngloGold understands that higher labor costs are never welcomed from a business perspective, but the alternative of mine closures is even worse.

As for IAMGOLD, it announced a $100 million cost-reduction program in early March aimed at cutting administrative expenses and reducing its capital expenditure budget. The point here is that IAMGOLD should remain profitable barring a dip below $1,000 per ounce in spot gold prices and that its strong liquidity position should provide an ample downside buffer. Yet again, short-sellers are playing with fire.

Foolish roundupThis week it's all about trend-setting. Diana and TJX have done a remarkable job setting the tone for their respective sectors, while IAMGOLD has overcome incredibly difficult mining costs to continuously turn a profit.

What's your take on these three stocks? Do short-sellers have these stocks pegged, or are they blowing smoke? Share your thoughts in the comments section below.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

Author

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and investment planning. You'll often find him writing about Obamacare, marijuana, drug and device development, Social Security, taxes, retirement issues and general macroeconomic topics of interest. Follow @TMFUltraLong